The promises and drawbacks of embedded insurance

October 22, 2024

24 1764 October 22 Exploring embedded insurance benefits 9.25 V1 03
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By James Norman, International Business Development Director, Sedgwick UK

Just think: What if travel insurance was embedded within the purchase of an airline ticket? It would be a quick, low-cost and clever way to bring insurance coverage straight to the customer, without the complexities inherent to navigating insurance policies. Embedded insurance — a different way of selling and distributing insurance — is drawing industry-wide enthusiasm while it expands across the consumer lines insurance landscape. The offering is added onto a digital transaction at the point of sale, which effectively embeds it within a commercial product and allows non-insurance brands to distribute it. 

By embedding insurance products within digital transactions, service and product providers seamlessly integrate innovative insurance solutions into their offerings and experiences, either as a complementary add-on or an add-on paid for by the customer. But are claims management and insurance organizations ready to make the drastic shift? Are consumers?

Factors contributing to its rise

Galvanized by brick-and-mortar store closures during the COVID-19 pandemic and a progressively digital-first culture, more consumers than ever have moved to the online sphere. According to a Salesforce study, more than half of customers surveyed prefer to engage with companies digitally (65% of millennials and 61% of Gen Z). Companies that want to meaningfully compete have been pushed to undergo a digital transformation to meet customers where they are. 

A robust online presence is not the sole requirement to remain a profitable consumer-facing company. Today’s consumer expects instantaneous service, an ease with which products can be purchased, and individualized offerings, ideally tailored to an individual’s specific preferences. Today’s consumer, by and large, wants choice — but the choice must be helpful, consistent and convenient.

These trends have paved the way for a type of customizable insurance that may be new in its reach, but nonetheless is familiar to the average consumer. When purchasing airfare, we’re all familiar with the option to add on travel insurance, or warranty coverage for a major appliance purchase — all with just one extra click. From a consumer perspective, embedded insurance offerings are typically low-cost, straightforward and quick, and turn every convention associated with insurance selling and buying on its head. 

One report by Conning, an investment management firm, projects the embedded market to exceed $70 billion in premium by 2030, particularly because it shifts key functions historically performed by banks to non-financial platforms. In part also due to increased digitization and adapting consumer preferences, technological investments have long been contributing to embedded distribution integration within certain travel insurance and extended-warranty products. Recently, we’ve seen increasing development in areas like mobile phones, laptops, e-scooters and motor products. Future growth has the potential to shake up the personal lines market, particularly standardized small business insurance, and the $179 billion personal auto insurance market.

Why insurers — and customers — like it

An insurer that possesses the required capabilities to be digital-first can innovate, automate and customize varied types of solutions on an unprecedented scale. Embedded claims are quite simple in nature and can be processed quickly at large volumes, boosting efficiency and shortening claim cycle times. And, offering embedded offers claims organizations’ a meaningful opportunity to drive differentiation through technology as it advances, while streamlining purchasing and protection. Increasingly, embedded claims are automatically repudiated or advanced to pay rather than handled manually, but top-notch human capital remains integral to manage the process when intervention is needed (for, say, a particularly enigmatic claim that may be fraudulent).

Taking out a traditional insurance policy has long been a notoriously confusing process. Embedded insurance presents as the opposite: by bringing the underwriting sales process directly to the customer, it relieves their burden of seeking out insurance coverage themselves. Perhaps most importantly, it eliminates a disruption to the customer’s journey by functioning instantaneously — one simple click to add-on insurance protection to your vacation; your smartphone; your refrigerator. Embedded is also transforming the benefits arena, too, which we expect to influence the landscape of employee medical coverage and voluntary benefits.

Challenges to widespread adaption/integration

Insurers must discern their risk appetite before proceeding; as a high-frequency, low-complexity claim, if the right controls are not in place, there is always a risk of fraudulent ones leaking through the claims process. Counter-fraud measures must strike a delicate balance: while its integration within the claims process is necessary to protect against fraud, it must function inconspicuously, to avoid disrupting an otherwise smooth customer experience — one of several challenges insurers must overcome to succeed in the embedded arena.

Meanwhile, technology and automation minimize the claim’s lifecycle, eliminate the need to manually itemize or intake the clam, and improve and simplify the process for the customer. The hope is that the cost, time, manpower and efficiency savings will eclipse any profits lost to the small fraction of fraudulent activity slipping through the counter-fraud mechanisms’ defenses.

The right claims partner is already equipped to implement embedded insurance in their offerings and deliver all the above-stated benefits. That partner needs three things: excellent claims capability; scale, to integrate growth markets; and a robust mixture of technology and innovation supplementing each other and functioning within a high-performance validation system.

Tags: Claims, empowering performance, Insurance, insurance industry, insurance market, Insurers, Risk